HK SFC reveals its enforcement agenda

Author: | Published: 21 Aug 2012
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As head of enforcement at Hong Kong’s Securities and Futures Commission (SFC), Mark Steward has earned himself a reputation as an uncompromising and intense career enforcer with zero tolerance for rule breakers. During his six-year tenure, SFC prosecutions have increased sharply. Steward has confronted bank executives over the sale of Lehman minibonds, won the Commission’s first criminal convictions for insider dealing, and forced a Chinese company to repay investors. His contract ends this month, but the 49-year-old Australian is reticent about his next move. Whatever he chooses to do, Steward will leave a strong legacy in Asia’s financial capital.

The recent London Interbank Offered Rate (Libor) fixing scandal and insider-trading allegations at China’s Cnooc have prompted increased interest in regulators’ capabilities. What provisions are there in Hong Kong’s Securities and Future Ordinance to address market manipulation and insider trading?

We have prohibitions against insider dealing and a whole suite of provisions dealing with market manipulation. There are six different varieties of market manipulation. We also have a catch-all provision, based on the US Securities & Exchange Commission’s Rule 10b-5, which invokes criminal sanctions for dishonest practices in relation to dealing in securities, futures and leveraged foreign exchange trading. We have a very wide range of prohibitions in Hong Kong law to deal with all kinds of market misconduct. The law covers the field as well as any other jurisdiction. All forms of misconduct are caught by our provisions.


What improvements could be made to ensure Hong Kong’s regulatory sanctions are sufficient to deter would be rate-fixers?

The law in Hong Kong is reasonably clear in respect of insider dealing and manipulation.

Clearly, if someone is, by whatever means, doing something dishonest that has an effect on the price or market for securities or futures, then we are able to take several kinds of actions in relation to that, both criminally and civilly. And that’s a consequence of the legislation we have here in Hong Kong. That’s not answering any particular issue that might arise with interbank rates; it’s simply that where there is dishonesty of whatever kind in our markets that affects the integrity of our markets, we have both criminal and civil remedies that will respond.


In recent years, Hong Kong has seen a series of accounting failures, fraud and other corporate scandals. How does the SFC tackle securities fraud?

There is no single answer to this question because the method of tackling each case is driven very much by the nature of the case. But let me tell you about the Hontex International Holdings case, one of our most recent cases.

Hontex was a mainland Chinese textile business that listed in Hong Kong through a Cayman Island incorporated entity. It raised around HK$1 billion ($128.9 million) through an IPO prospectus. Shortly after listing, we sought and obtained court orders freezing as much of the IPO proceeds that remained in Hong Kong (around HK$800 million) based on allegations that the prospectus contained false or misleading financial information. At trial, we sought injunctions and orders that would require the company to pay an additional amount of around HK$200 million to return the total money frozen in Hong Kong to the amount raised in the IPO and then to effect a return of capital to the shareholders, through a share repurchase scheme. In other words, giving shareholders the chance to recover their capital which had been invested on the basis of a false prospectus. The point of this was to undo the fraud so that investors could be placed as closely as possible back into the position they were in if the fraud had never happened. The court had never made orders like this – undoing the fraud – in response to securities misconduct.

After a couple of years of quite complicated litigation, we succeeded in getting those orders. They are now being put into effect. That means every shareholder in the company, as of the date from which the shares were suspended, should have an opportunity to receive their capital back at least up to the closing price of the stock on the day the shares were suspended.

We’ve never been able to do something like this before. It’s a consequence of having some certainty in relation to the court’s jurisdiction under section 213 of the Securities and Futures Ordinance. And that certainty is something we have fought very hard for. It is the result of a Court of Appeal decision in February this year where the Court determined that there was jurisdiction in the High Court to grant final remedial orders in response to contraventions of the law. This was in our litigation with US hedge fund, Tiger Asia, over allegations of insider dealing and manipulation. This decision confirms the court’s power to undo or reverse the consequences of securities fraud as an additional outcome to the normal deterrent sanctions that we continue to seek.

The Tiger Asia decision was one of three significant decisions made in our favour this year by Hong Kong’s High Court. [It] confirms that the court has jurisdiction to grant remedial orders in respect of contraventions and really lays the framework for more significant civil litigation in the future.

The second significant High Court decision was in the [case of] Styland Holdings Limited, a listed company. We brought proceedings against some of the directors alleging that their misconduct had caused substantial loss to the company and its shareholders and seeking orders, not only deterrent sanctions that they be disqualified from acting as directors but also that they pay compensation to the company. The Court granted those orders in April 2012. This was the first time we had secured compensation orders in favour of a listed company, where directors had been found guilty of misconduct and subsequently disqualified.

Hontex was the third of those cases. In this case, the potential of these powers to remediate contraventions that had caused loss or damage to retail investors was realised to its fullest degree so far, with over HK$1 billion available for mum and dad investors. Our approach then is to balance, as far as we can, the need for deterrent sanctions, including civil penalties and criminal sanctions, which focus on the wrongdoer, with civil remedies that tackle the consequences of wrongdoing on the investing public. It is not enough to tackle wrongdoing by only focusing on the wrongdoer and not also doing something about the consequences of the wrongdoing on the market and the investing public.

This is how we are tackling securities fraud. The issue of deterrence is a very important, and we have had a string of cases where serious deterrent sanctions have been imposed by the courts. But in addition I think we recognise that securities fraud causes actual harm and damage to investors and that in order to ensure confidence in the market, there needs to be enough muscle in the regulatory framework to undo those harmful consequences and, if need be, to recover money for investors when it is lost through misconduct and fraud especially if investors can’t do it for themselves because their individual claims are too small or too difficult. We are very proud of these cases. They are the result of a lot of years of hard work, and give us a framework to seek these sorts of orders again in the future.

Potential issuers should take from this that you don’t get away with misconduct. Hong Kong is a quality market for quality issuers. The test of quality is a real test of quality; it is not a notional test. That’s what issuers should think about when they consider listing in Hong Kong.


Do you have any response to comments in the UK market that SFC proposals to introduce criminal liability for IPO sponsors have deterred issuers from listing in Hong Kong?

We are reviewing the submissions that have been made in response to the consultation paper on this. But I think the view you refer to is a little bit exaggerated, if not significantly exaggerated. There is already criminal liability for issuers and directors of issuers. What is being discussed in Hong Kong is that there be liability for IPO sponsors. Now, in effect, that’s not a big step at all. It’s saying if a sponsor is recklessly or knowingly involved in the making of a false or misleading statement to the market then they should be accountable for that. There should not be anything controversial or problematic about that. It is simply extending a kind of liability that already exists in the law. Perhaps those who are complaining have something to be worried about.


What’s next on the SFC enforcement agenda?

I don’t think it’s right to signal too many specific actions in advance of commencement. The past 12 months is a pretty good guide for the future so far as SFC enforcement is concerned. The three cases I’ve highlighted indicate [our] style, direction and nature, as well as the sorts of things we are interested in and where we are going. We also have a number of criminal trials afoot and pending. There is no significant change in our direction or in our priorities. We are now working on further consolidating our position in relation to these sorts of outcomes.


The full interview will be available next month in IFLR’s 2012 Guide to Litigation and Dispute Resolution